China's yuan is expected to get a boost from a weakening US dollar in the short term as the United States will likely maintain its relatively easy monetary policy, even though Republicans and Democrats agreed to raise the US debt ceiling, market watchers said yesterday.

But economists hold a positive stance over the long-term valuation of the US dollar, as backed by the world's largest economy, and argued that China won't dispose of US debt in a swift and massive manner.

The yuan's official exchange rate against the US dollar has been climbing recently, hitting a 17-year high of 6.4399 against the dollar on Monday before edging down to 6.4419 yesterday. The Chinese currency has risen nearly 5 percent over the last year.

"The US dollar may remain weak in the short term after the deal agreement due to risk aversion," said Shen Lan, an economist with Standard Chartered Bank. "The yuan will continue to appreciate against a weaker US dollar as the US government will carry on with its relatively easy monetary policy at least into the next year."

Analysts said the agreement to raise the borrowing ceiling will have only a limited positive impact on the US economy, but the credit of the US depends on the country's fiscal policies and their implementation.

Bonds on notice

Standard & Poor's on July 21 put the US on notice for a possible downgrade from its AAA rating in the next three months. Such a move would raise the nation's borrowing cost by 0.6 to 0.7 percentage point.

Shen said the debt deal will have a larger impact on the US economy than exchange rates, and she estimated the yuan will further appreciate to 6.30 to the dollar by year end.

Her view was echoed by a trader in Shanghai, who observed thin trading and only small fluctuations of the exchange rate on the over-the-counter market yesterday.

The trader said the debt ceiling agreement was expected by the markets and won't have a great impact on the domestic currency market.

However in the long term, Shen suggested that the US dollar will remain a valuable investment, and China will still put a large stake of its foreign exchange reserves in buying US debt.

"The debt crisis in Europe will be haunting investors for a long time while the bond market in Asia is too small," said Shen. "China is slowly diversifying its investment and increasing its holding of debt of European and Asian countries, but the US debt will still be a main investment."

The People's Daily yesterday said the agreement is a "double-edged sword" for China's economy, as it will prevent a double dip recession in the US but that the possibility of future defaults remains.